LabCorp Sees Balanced Growth; Covance Synergy On Track

On Jun 20, 2016, we issued an updated research report on Laboratory Corporation of America Holdings (NYSE:LH) , or LabCorp, a leading independent clinical laboratory company. It is currently working on portfolio expansion. The company is more focused on the high-margin esoteric testing business to drive its top line.

With the acquisition of Covance, which is now operational as Covance Drug Development, LabCorp expects to expand its range of diagnostic offerings and create a new industry leader in both the laboratory testing and CRO spaces. This will act as a leading provider of medical testing apart from operating as a premier full-service drug development organization.

Earlier LabCorp had set a goal of $150 million in incremental revenues by the end of 2018 ($100 million for companion diagnostics and $50 million for real world evidence). In the last reported quarter (first-quarter 2016), the acquisition of Covance contributed $687.3 million to the company's revenues, driving 23.7% year-over-year growth. The company is currently on track to achieve the incremental revenue synergy target.

Moreover, LabCorp expects to achieve annual cost synergies in excess of $100 million, to be fully realized within three years of closure of the acquisition. Of this, the company has already achieved $50 million and looks well positioned to achieve its targeted synergy, going ahead.

LabCorp has also strengthened its foothold in the diagnostics space through both organic and inorganic means, and plans to collaborate with leading companies and academic institutions to provide a wider portfolio of tests. In Mar 2016, the company acquired full-service independent women's health laboratory, Pathology, Inc., including the patient service centers used to conduct the latter’s medical testing and services business.

Among strategic partnerships, recently the company formed an alliance with Interpace Diagnostics, a developer of molecular diagnostics tests, to begin offering the latter’s new ThyraMir microRNA classifier test. Other recent collaborations include the alliance with Japan-based Sysmex Corporation – a leading clinical laboratory services provider. LabCorp also signed a strategic agreement with biotechnology company, ORIG3N, a leading provider of induced pluripotent stem cell (iPSC) repository called LifeCapsule.

Also, as part of its five-pillar strategy, LabCorp is currently working hard on new innovations with academic institutions in order to capture the growing lab testing market with its advanced assays and tools.

We also note that LabCorp’s first-quarter earnings and revenues both exceeded the Zacks Consensus Estimate. The company recorded a strong quarter with respect to organic volume growth in LabCorp Diagnostics, accelerated revenue growth in Covance Drug Development and operating leverage.

On the flip side, the current economic uncertainty remains a deterrent for LabCorp. The strengthening of the dollar continues to weigh on its year-over-year revenue performance. Moreover, changes in governmental regulations had a significant impact on the company’s operations. We are highly disappointed with the recent CMS proposal related to the Protecting Access to Medicare Act (PAMA).

LabCorp currently carries a Zacks Rank #2 (Buy).

Key Picks in the Sector

Medical instruments stocks that are worth a look include The Cooper Companies Inc. (NYSE:COO) , Henry Schein, Inc. (NASDAQ:HSIC) and CR Bard Inc. (NYSE:BCR) . All these stocks carry a Zacks Rank #2.